Is Luxembourg’s tax haven status in jeopardy?

Is Luxembourg’s tax haven status in jeopardy?

Former Luxembourg prime minister Jean-Claude Juncker’s election as president of the EU Commission could threaten Luxembourg’s long-held status as a European tax haven.

Last Tuesday, the European Commission announced in its preliminary findings that two EU member states may have provided unfair state assistance to major corporations: one in the Republic of Ireland for its treatment of Apple, Inc., and the other against Luxembourg and its dealings with Italian automaker Fiat. (There is another one in the pipeline, the case of the Netherlands providing corporate tax advantages to Starbucks.)

The Apple case against Ireland has drawn the most attention, in part due to the significant size of the potential deal (the repaid taxes Apple may be forced to pay if the Commission ultimately finds that Ireland acted improperly could reach as high as several billion dollars).

However, the Luxembourg case is more important politically. EU Commission President-elect Jean-Claude Juncker served as prime minister of Luxembourg during the period in which the duchy may have broken EU competition regulations and provided unfair tax advantages to Fiat. The deal, which was approved in 2012 in Juncker’s last of 18 years as prime minister, may constitute illegal state aid because its decision to approve a transfer pricing scheme for the company ultimately reduced the charges Fiat would normally be required to pay for its international dealings.

The case shines a harsh light on Luxembourg’s role both as an integral EU member and a tax haven subverting competition within the EU. The government of Luxembourg (including Juncker, who has repeatedly bristled at the idea that his country is a tax haven) has consistently refuted the notion Luxembourg provides unfair advantages to corporations at the expense of the EU common market.

Luxembourg ranked by Transparency International as the 3rd most financially secretive country of the 71 countries it analyzed. Its $2.73 trillion in investment funds dwarfs its GDP of $41 billion; there are advantages to having business operations in the country with a population 525,000. (In comparison, if the United States had a similar proportion of investment to its GDP, it would be sitting on $1 quadrillion in investment funds).

The country has consistently blocked key banking secrecy reforms at the EU level, and most of these actions occurred under Juncker’s premiership. Luxembourg, occasionally with support from Austria, strongly opposed measures to tighten banking regulations, withholding tax verifications, and has been reticent in providing information to EU investigators regarding tax inquiries.

The OECD criticized Luxembourg in November 2013 for being one of only 4 countries not to provide information on its implicit tax rate on capital, while also noting that FDI to Luxembourg stands at 4,701% of GDP, higher than any other country (Mauritius is 2nd at 2,500%; Ireland is at 171%).  The organization also recorded the country as non-compliant with the regulations suggested by the Forum on Transparency and Exchange of Information for Tax Purposes, sharing the title with 3 others-the Seychelles, Cyprus, and the British Virgin Islands-of 64 states at Phase 2 of its banking reforms.

Of the Forum’s 10 measures of transparency and exchange of information, Luxembourg was only fully compliant with 2 of them, and fully non-compliant with 4 of them-due in part to the fact that Luxembourg has been unable (or possibly unwilling) to enforce some of its transparency laws, especially in access to information and EOI mechanisms for the exchange of information.

Will the ongoing investigations regarding Luxembourg, the Netherlands and Ireland lead to significant EU-level reforms regarding tax havens and tax avoidance schemes? Although some believe this may represent a significant push toward real reform, given Luxembourg’s history of blocking reform, there are unlikely to be any breakthroughs in this new series of investigations.

It is little coincidence that several major EU states-the UK (Gibraltar, Jersey), France (Monaco), and Spain (Canary Islands)-have their own difficult questions to answer regarding support for corporate tax shelters (though France’s questions are slightly less precarious, given Monaco’s position outside the EU).

But despite the slow pace of reforms, Luxembourg’s behavior on corporate tax advantages may prove to be a source of significant embarrassment for President Juncker. As a representative of the entire European Union, it will be his responsibility as well incoming European Commissioner for Competition Margrethe Vestager’s to ensure an equal playing field to protect the EU’s common market. In contrast to his role as prime minister for a small state, Juncker will now have to represent hundreds of millions of EU citizens, businesses, and transactions that incur costs from unfair tax systems.

Whether Juncker rises to the challenge remains to be seen, but his high profile role as President of the European Commission almost certainly ensures that his country’s policies will receive more scrutiny than in the pre-Juncker era, and may be enough to jumpstart significant reforms in Luxembourg.


Categories: Europe, Politics

About Author

Brian Daigle

Brian is an energy and Latin America researcher at a political consulting firm in Washington, D.C. He is a London School of Economics (LSE) graduate in political science and political economy, where he focused on trade and transatlantic relations. Brian received his dual BA in political science and history at the University of California-San Diego.